Understanding the TDS Tax Deducted at Source on current account interest

Posted on Friday, December 29th, 2023 | By IndusInd Bank

If you run a business or are planning to set up one, it is important to have a current account to manage the day-to-day financial transactions. Furthermore, you must be aware of the term TDS, i.e., Tax Deducted at Source. Tax Deducted at Source is the tax collected by the government on the source of income of businesses. In this blog, we will try to explain the following in detail:
1. What TDS is and how it impacts businesses
2. The impact of TDS on current accounts
3. Section 194N of the Income Tax Act 1961

What is Tax Deducted at Source TDS?

Specific income earned by an individual or business owner are subject to tax. TDS, or Tax Deducted at Source, serves as a government tool for collecting taxes directly from the source of an individual’s or business’ income.

The purpose of introducing this tool was to tax the income, either wholly or partially, when it is generated, to reduce tax evasion. 

FY2022-23 has seen TDS applied not only on incomes like salaries, sale of property, interest income and dividends, but also on the income you earn by way of online gaming, cryptocurrencies, and Non-Fungible Tokens NFTs. 

Impact of TDS on current accounts

A current account is a bank account used to cater to the requirements of those in business and does not bear any interest. Given that a current account does not generate interest income, TDS is not relevant here. However, another area in a current account attracts TDS under Section 194N of the Income Tax IT Act of 1961 – cash withdrawals. 

Let’s explore more about the provisions of Section 194N and TDS rules on current accounts.

What is Section 194N? 

Section 194N of the IT Act was introduced in the Union Budget of 2019 by the then Finance Minister, Nirmala Sitharaman, mainly to dissuade cash payments. As such, TDS applies to cash withdrawals that surpass ₹1 crore.

However, in the Union Budget of 2020, the TDS limit u/s 194N was reduced to ₹20 lakhs, for those taxpayers who did not file their ITRs for the previous 3 years.

In the Union Budget of 2023, the threshold limit for annual cash withdrawals for cooperative societies was increased to ₹3 crores.

According to Section 194N, if you have cash withdrawals in a particular fiscal year exceeding ₹20 lakhs or ₹1 crore as the case may be, TDS will be applicable. This applies to the sum or an aggregate of sums withdrawn from a specific bank in the financial year. 

Section 194N – Who must deduct TDS and who must pay TDS?

Any person who pays either a sum or an aggregate of sums exceeding the specified limit is responsible for deducting the TDS of 2% of the sum from the receiver’s account. 

i. Who must deduct TDS?

The following entities are tasked with TDS deduction:

• Banking companies includes any bank or banking institution covered u/s 51 of the Banking Regulation Act, 1949 
• Post offices
• Co-operative societies engaged in banking services

ii. Who must pay TDS?

The following taxpayers are liable to pay this tax:

• Individuals
• Companies
• Hindu Undivided Family HUF
• Local authorities
• Limited Liability Partnership LLP or partnership firms
• Body of Individuals BOIs 
• Association of Persons AOPs

iii. Exceptions to the provisions of Section 194N

The provisions of this section do not apply to payments made to:

• The government
• Any banking company or a cooperative society or their business correspondent engaged in banking or a post office business
• White-label ATM operators
• Any other person whom the government notifies in consultation with the RBI

Section 194N – TDS rules for current accounts

TDS rules for current accounts

Though current accounts do not generate interest income, they offer the benefit of limitless cash withdrawals. Therefore, you’re free to withdraw any sum, provided it aligns with Section 194N of the Income Tax Act.

Section 194N has laid down TDS rules regarding cash withdrawals. The table below will give you an idea of the TDS applicable.

TDS will be deducted at the rates prescribed if cash withdrawals made by the taxpayer are more than ₹20 lakhs or ₹1 crore as the case may be during the fiscal year.

If you are a merchant or retailer, a zero-balance current account like IndusInd Bank Indus Tarakki Current Account would help you manage your daily transactions seamlessly and take your business a notch higher.  

Section 194N – Calculation of the threshold limit

So, how is the threshold limit calculated for cash withdrawals? While making a cash payment exceeding ₹1 crore to the bank account of an individual, the tax will be deducted by you, the payer. This deduction is made at the time of making the payment. 

You must note that this limit of ₹1 crore in a fiscal year is concerning the post office or bank account and not the taxpayer’s account.

A simple example will help you understand how the threshold limit is calculated:

Suppose you have two bank accounts with two different banks. You have filed ITRs for the previous three years and made cash withdrawals of ₹1 crore each from both banks. This means both these individual cash withdrawals amounting to ₹2 crores in total will not attract any TDS in this scenario. In case the cash withdrawals exceed the specified limit in both banks, the bank must deduct the TDS at the rate applicable.

What is a current account?

A current account refers to a non-interest-bearing account that caters to individuals or businesses who engage in high-volume transactions with the respective banks daily.

The two key attributes that make a current account appealing for business owners include:

1. Liquidity: A current account offers you liquidity. As a result, you do not earn interest on your deposits in a current account.
2. Cash withdrawals: A current account enables multiple cash withdrawals. It does not impose restrictions on the number of cheques issued or online fund transfers.

You can easily open an online current account with IndusInd Bank and get rid of the hassles involved with traditional banking. IndusInd Bank’s digital current account offerings are designed in a way to add more value to your business.

The benefits offered include:

• Selecting a unique account number via MAMN My Account My Number
• Setting high transaction limits on online transfers
• Enjoying dynamic limits on cash deposits

Conclusion

As current accounts do not pay any interest on the credit balances, they do not attract TDS rules. Nonetheless, transactions in a current account are subject to the stipulations of Section 194N of the Income Tax Act 1961.

To enjoy seamless business transactions as a business owner or trader, you must own a current account with the best bank for your current account. So what are you waiting for?

Apply now for a current account with IndusInd Bank and make the best use of the benefits offered. 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.